NEW YORK/HAMILTON, Bermuda (Reuters) - As bond insurer titans MBIA Inc and Financial Group falter, smaller players in Bermuda, 700 miles off the US seaboard are looking to take centre stage.

The 21-square-mile British territory is home to Assured Guaranty and CIFG, two of the biggest potential winners as rivals MBIA and Ambac, the world's two biggest bond insurers, suffer due to exposure to bad US sub-prime mortgages and risky debt. Along with No. 3 bond insurer FSA, based in New York, Assured and CIFG are expanding as competitors struggle to maintain their investment-grade "AAA" ratings.

"This is their opportunity to muscle in when the dominant players are ailing," says Rob Haines, senior insurance analyst at CreditSights Inc. in New York.

Along Bermudiana Road in Hamilton, known locally as "Insurance Row," pricey champagne and lavishly catered parties are still in high demand.

Companies like Assured Guaranty are on the move, this week opening a new office in Sydney to expand its business in Australia and Asia. The firm's other greatest growth areas are in Britain, Spain and Italy, Assured CEO Dominic Frederico said in an interview.

"We see international operations as a great growth opportunity in Europe, Australia and Asia," Frederico said. "We could be No. 2 or No. 3 in terms of US public finance deals. We should be able to grab a fair share of the market."

Municipal bonds insured by MBIA; Ambac; FGIC, a unit of Blackstone Group LP; XL Capital Assurance, a unit of Security Capital Assurance, and others have dropped in value on fears that insurers could lose their top ratings due to insufficient capital plans.

Bonds insured by Assured and Dexia's Financial Security Assurance have fared better, as those insurers are less vulnerable to downgrades since they have largely side-stepped exposure to risky debt securities known as collateralised debt obligations that generated high premiums during the boom years.

MBIA faltered last year by expanding into so-called structured finance and guaranteeing $8.1 billion of the riskiest of those CDOs.

Similar missteps may result in further losses for bond insurers and Wall Street banks.

MBIA shares suffered their biggest declines in 13 years after that revelation in December and had its biggest one-day decline ever in a volatile year. In January a year ago, MBIA stock traded at a record high.

MBIA fell almost 4.0 percent on Wednesday after saying it would cut its quarterly dividend while Ambac fell 0.9 percent. Both insurers' shares dropped more than 71 percent last year.

Smaller Bermuda bond insurers are not the only players smelling an opportunity.

Billionaire investor Warren Buffett kicked off the new year by unveiling Berkshire Hathaway Inc.'s new bond insurance arm, Berkshire Hathaway Assurance Corp., as the latest player in the $2.5 trillion US municipal bond market.

Buffett's new company on Wednesday made its first deal by insuring $10 million of outstanding New York City debt.

"Warren Buffett's recent entry into these markets underscores the continued value of financial guarantee insurance," said John Pizzarelli, the chief executive of CIFG who has inside knowledge of rival MBIA, where he worked for two decades before joining CIFG.

Bermuda's CIFG also has benefited from a $1.5 billion capital injection from shareholders of its French parent company Natixis.

While Assured's Frederico agreed with CIFG's assessment of Buffett, he cautioned: "You are talking about the 800-pound gorilla. That's a name that's highly respected, has a connotation of financial strength and consistency, so they would be formidable."

Cracks in the $2.5 trillion bond insurance market, and declining property insurance rates, have yet to hit Bermuda in the most tangible way — a tightening of purse strings.

Over the year-end holidays, Brian O'Hara, chief executive of XL Capital, majority owner of No. 5 bond insurer SCA's XL Capital Assurance, dined at the Little Venice Restaurant's sun-decked front terrace with Henry Keeling, XL's chief operations officer, who is often cited as a candidate for the CEO job when O'Hara retires this year.

Once a tourism mecca, the island now counts far more business than leisure travellers. On the westernmost flank of Hamilton, the island's capital, Bermuda bond insurers are banking on more visitors to come.